Friday, July 15, 2011

On Why Adam Larsson's New Entry Level Contract Is Not The Steal It Appears To Be

In 1993, Alexandre Daigle made headlines with the contract he signed - 5 years, 12.25 million in total. He then used this money to buy a dress. Or something - that was ages ago, and I can't be counted on to remember every single detail. Whatever the case, that was an absolutely outrageous sum at the time, and led to the creation of a rookie salary cap in the NHL's next CBA. The rookie wage system has been even more refined since then.

Note: Some of you will already know all of this stuff, but I think the fullest explanation is usually best, especially when starting a blog.

In 2011, Ryan Nugent-Hopkins was drafted first overall. He signed a contract that pays him $925,000 per season in base salary. $925,000 is the maximum rookie salary allowed by the CBA. He can also receive a potential $2,850,000 in bonus money each season. Mika Zibenijad was drafted sixth overall in 2011, and he signed a contract which pays him $925,000 in base salary per year, along with $850,000 per year in possible bonuses. Adam Larsson was taken fourth overall, and he signed a contract which pays him $925,000 per season, along with $000,000 in bonuses. Yes, you read that correctly - he is receiving no player bonuses. How could the 1st overall pick and 6th overall pick get bonuses, while the 4th overall pick gets none? Let's delve into the murky underworld of the collective bargaining agreement, where even Gary Bettman fears to tread.

A: The Bonus Cushion Does Not Refer To Weight Gained Thanks To Expensive Dinners Out

Section 50.5.h of the Collective Bargaining Agreement sets out the definition of the bonus cushion. If you prefer speaking Lawyer, here is the full text:

"A Club shall be permitted to have an Averaged Club Salary in excess of the Upper Limit resulting from Performance Bonuses solely to the extent that such excess results from the inclusion in Averaged Club Salary of: (i) Exhibit 5 Individual "A" Performance Bonuses and "B" Performance Bonuses paid by the Club that may be earned by Players in the Entry Level System and (ii) Performance Bonuses that may be earned by Players pursuant to Section 50.2(b)(i)(C) above, provided that under no circumstances may a Club's Averaged Club Salary so exceed the Upper Limit by an amount greater than the result of seven and one-half (7.5) percent multiplied by the Upper Limit (the "Performance Bonus Cushion")."

Translating, it means that the club is permitted to go over the salary cap by as much as 7.5% so long as the excess is made up of money that is to be paid via bonus. So let's posit a $60 million salary cap, a team could go up to $64.5 million in total money, if $4.5 million of that is money that may be earned via bonus. Simple enough, right? Any money that was actually earned via bonus, if it was in excess of the $60 million salary cap, would carry over to the next season. However, there's this little catch written in at 50.5.h.iii.C:

"If the NHLPA exercises its option to extend this Agreement to September 15, 2012, consistent with Section 3.1(b) of this Agreement, then for the 2011-12 League Year, all of the above-described Performance Bonuses that could be earned by the Players under SPCs with a Club shall be counted against such Club's Upper Limit for that League Year (with no opportunity for the Clubs to "carry over" any charges to their Upper Limit for the following League Year)."

The NHLPA has exercised their option to extend the agreement to 2012, and as a result, there is no bonus cushion this season. Ryan Nugent-Hopkins therefore has a $3.75 million cap hit this season.

B: The New Jersey Devils Are Up Against The Salary Cap

I don't want to delve too much into this issue, as it complicates things. Let it be said that the Devils, according to capgeek.com, have $6.7 million in salary room with 21 players signed. That sounds like a lot of room, but that player yet to sign is Zach Parise. He will no doubt command a large salary. Had Adam Larsson taken the normal amount of bonuses in his contract, his salary cap hit would have been somewhere between $2 million and $3.5 million. The Devils would likely not have been able to afford him this season unless they got rid of other players in order to make room. That's not a move that would make a whole lot of sense, given how poor the typical 18 or 19 year old defenseman is.

C: The Entry Level Contract Slide

Ok, so we're Adam Larsson now, and we've signed a hypothetical $3 million dollar per season deal, with most of that money coming in bonuses. We get sent down to the AHL and we stay down there the entire season. We lose a year off our contract, right? Nope - if a player is 18 or 19, and has a signed contract, his contract doesn't begin until he plays 10 NHL games in a season. The contract 'slides' - a contract can slide a maximum up to twice. So even under this scenario, Larsson would still have 3 years left on his entry-level contract. Even Karl Alzner, who pundits are saying left a lot of money on the table in his current deal, now makes $1.3 million per season, a step up for $900,000 and bonuses. Larsson would make $925,000 if he plays the full season in the NHL, but significantly less than that if he plays in the AHL (probably $70,000).

D: Performance Bonuses - What Are They?

Exhibit 5 of the Collective Bargaining Agreement sets out what items a team can give bonuses for.

For a defensemen, they are as follows:

Top 4 On Team Among Defensemen In Ice Time (min 42 GP)

10 Goals

25 Assists

40 Points

.49 Points Per Game

+/-: Among Top 3 D On Team (min 42 GP)

All Rookie Team

All Star Game

All Star Game MVP

None of these bonuses can exceed $212,500 for any individually, or $850,000 in total. Let's examine, since 1995-96, how often defensemen aged 18-21 have hit some of these plateaus. There are 165 player seasons in total. As a proxy for top 4 in ice time, I am instead using 1500 total minutes played.

1500 minutes played - 47 times

10 Goals - 21 times

25 Assists - 31 times

.49 PPG - 18 times

So, he might have hit some of these performance bonuses - certainly 1500 minutes played seems pretty likely by Year 3, if he is as good as they say he is. Victor Hedman, the player that people compare him to endlessly, has done that for both his seasons in the NHL so far.

The other performance bonuses are more outlandish, but the relevant ones include winning the Norris Trophy, Conn Smythe Trophy, or Calder Trophy. He would also get a bonus for finishing in the Top 3 of Calder voting. Any or all of these are seriously unlikely to happen.

E. Getting A Head Start On A Contract Is Massively Valuable

Let's go over some rules on free agency now.

A player becomes an unrestricted free agent either when he is 27 or older on July 1 of that calendar year, or has played 7 NHL seasons. If Larsson were to begin his contract this season (by playing more than 10 games, remember), he would be eligible to become an unrestricted free agent in July of 2018. That's of course assuming that the rules governing free agency don't change. If Larsson's contract began next year, he would be eligible to become UFA in 2019, and his contract must begin the year after; he would be a free agent in 2020.

Anyone who was paying attention on July 1 saw the exorbitant salaries that even mediocre players command when they become unrestricted free agents. Larsson playing this year would mean he'd be able to take part in that frenzy two years earlier than his birthdate would indicate.

Larsson would also be a restricted free agent in 2014 if his contract began this year - this means a higher salary, although had he signed for, say $3M, he might've had more potential bonus money. Still, we've seen how difficult it is to hit some of these bonuses. A star like Drew Doughty will certainly earn significantly more in his next contract than he ever could have with bonuses.

F: Conclusion

Without the specifics of each entry level contract and what bonuses are placed in there, it's hard to say just how much 'potential' money Adam Larsson passed on by not having those bonuses in his contract. Regardless, with New Jersey's potential salary cap difficulties, Larsson has secured himself a chance to play on this year's team. If he does play 10 games this year, he will almost certainly manage to make up the potential money lost in bonuses with a higher salary in 2014-15 and 2018-19, as those are the years he is eligible to be an RFA and UFA respectively. While the Devils are presenting this deal as a kind of sacrifice, it's also rather shrewd. If Larsson is as good as people are saying, he'll have the opportunity to make up this cash elsewhere. If he's not that good, he wouldn't've made that bonus money regardless.

2 comments:

The only scenario I can see where he'd a lot worse off money-wise is if he plays for a few years at a high enough level to have gotten those bonuses but then his level either drops off substantially or he has injury problems. It's a pretty big parlay, though. Definitely seems like he'll be about as well off or better in the long run with this deal.